Luxury Marketing in China: How Volkswagen Does It

Be the First to Open a Store to Show Commitment to a Market, Says VW's Paul Hu

Faced with slumping sales in more mature markets, luxury brands are increasingly relying on consumers in China's burgeoning lower-tier cities to shore up the bottom line. In fact, the increased purchasing power in these markets "may be the biggest shift in marketing in China since the opening of the country in the 1970s," said Paul Hu, managing director of the Volkswagen brand at Volkswagen Group Import China.

In his keynote address Sept. 5 at Market to Watch: Building Brands Beyond Tier One in China, presented by Ad Age and Thoughtful Media, Mr. Hu stressed that brands need a different strategy when entering China's less developed cities because wealthy consumers there differ from their counterparts in Beijing and Shanghai.

Mr. Hu shared a few best practices from a case study of the Phaeton luxury sedan. The vehicle wasn't a success in the U.S. but hit the sweet spot among a certain segment of luxury consumers in China -- those who worked hard to earn wealth and wanted a luxury car that would be functional, not too flashy and that represented value for the money.

Hometown glory. People remember the first McDonald's to arrive in their town. Be the first to open a bricks-and-mortar store to show your commitment to the market. Phaeton's marketing centers on the Phaeton Lounge, a sleek space where consumers can learn about the car. VW aims to have 15 lounges in China by 2015, including 12 in lower-tier markets.

Family matters. Consumers in lower-tier venues seek social acceptance, so a major purchase requires the approval of friends and family. VW encourages consumers to bring their entire entourage to the lounge.

Time to decide. Consumers in lower-tier markets enjoy a more relaxed life and take their time in making a purchasing decision. Customers want plenty of information but also time to think about it.

But who are these consumers? About 2.7 million people in China have at least a million dollars, says Rupert Hoogewerf, who founded the Hurun Report luxury publishing house that issues a hotly awaited annual China Rich List.

Then there's the "superrich," defined by Mr. Hoogewerf as the 63,500 people with $15.8 million or more. On average, they are 43-year-old men with a 41-year-old wife and a 14-year-old child. They haven't been wealthy long. "It was after 2007 that people suddenly had the real money," Mr. Hoogewerf said. The superrich are going back to business school, collecting watches and art and playing golf. (The women do yoga.)

Some 90% of the superrich hope to send their children abroad to study, and Mr. Hoogewerf advises marketers to "get to the children," who influence Chinese opinion when they bring brands home.

Many speakers agreed that brands with history or a compelling story do better in China, standing out amid the massive influx of new products. Rebecca Ip, Tiffany & Co.'s VP for greater China, has prioritized teaching consumers about the brand's 175 years of history. To differentiate the jeweler from other brands, the company hosts morning Breakfast at Tiffany's events with about 20 guests to establish a personal connection.